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Insurer appointed as defense lawyer who is not obliged to act affirmatively for insured



After a mechanic named Charles Vititoe was injured while working on the rim assembly of a semi-trailer chassis in Charleston, South Carolina Flexi-Van Leasing, Inc. ("Flexi-Van") who owned the chassis to which the rim unit was attached ("Chassis") ("Underlying action") he sued. Flexi-Van was defended by the passengers subject to rights. In Flexi-Van Leasing, Inc. v. The Travelers Indemnity Company, No. 19-1847, United States Court of Appeals for the Fourth Circuit (November 23, 2020) Flexi-Van claimed that there was a conflict with its appointed defense lawyer because he refused to make a counterclaim against another party without Flexi-Van paying the lawyer despite the fact that the policy only prescribed defense and damages.

As Flexi-Van became concerned that there was a "real possibility" that Flexi would not be covered under the policy if a judgment was rendered against it in the underlying action, it requested that the lawyer file a third-party complaint against Interstar. Defense attorney Wall informed Flexi-Van that he was willing to do so, but Flexi-Van would have to pay him to make third-party complaints, which travelers would not do. As a result, Flexi-Van claimed that Wall had a conflict of interest and could no longer protect Flexi-Van's interests.

Flexi-Van claimed that it was entitled to: (1) a declaratory judgment that it is entitled to a defense and compensation from travelers for the allegations in the underlying action; (2) violation of the policy of not defending and indemnifying; and (3) breach of the implied obligation of good faith and fair trade.

The District Court issued a series of decisions granting the Travelers movement a summary judgment regarding Flexi-Van's violation of the implied duty of good faith and fair trade, claiming that Flexi-Van acted prematurely by firing Defender Wall before interests diverged and a real conflict arose.

ANALYSIS

Flexi-Van questioned the district court's decision that there was no conflict of interest. Flexi-Van claimed that it was a conflict for two reasons. First, it claimed that the traveler's booking of rights created a conflict. There is no South Carolina law that directly addresses this issue. The court could not conclude that the Supreme Court of South Carolina would declare so little confidence in the integrity of the members of the South Carolina bar that it noted that strict ethical standards govern South Carolina attorneys. The South Carolina Rules of Professional Conduct mandates that an attorney may not accept compensation for representing a third-party client unless certain conditions are met, including that the attorney's judgment must remain independent.

If an insured refuses to consent to an insurer's choice lawyer without conflict, the insured insures his right to compensation for defense fees.

Even if it is not a in itself conflict, a booking of rights can still create an actual conflict where the parties lack a common interest. As the district court found, Flexi-Van and travelers had a common interest in proving that Vititoe was wrong in the underlying measure at the time of issuing the rights reservation. In view of the common interest, the district court correctly found that the booking of a reservation on rights did not create a conflict of interest. Flexi-Van's dismissal of defense attorney Wall was therefore premature.

Flexi-Van also claimed that there was a conflict of interest due to Wall's alleged failure to file a third party complaint against Interstar. But the minutes show that Wall did not refuse to file a third-party complaint against Interstar. In fact, he explicitly stated that he would do so. Wall only insisted that Flexi-Van pay him to do so, as travelers would not do so because they believed they had no obligation to pay for Flexi-Van's third-party claims under policy and South Carolina law.

The District Court rightly found that the refusal to initiate a third-party action against Interstar stems from the Traveler's refusal to pay Wall to file a third-party action, not from any independent decision on Wall's part. Finding a conflict of interest in this scenario would actually destroy the insurer's ability to hire a lawyer to defend its insured solely within the framework of an insurance policy. The existence of a coverage issue alone does not give rise to any actual conflict.

Flexi-Van fired Wall before a real conflict arose and Flexi-Van was not entitled to compensation for settlement costs in the underlying measure.

Since there was a reasonable basis to dispute a claim, there is no bad faith. Travelers had reasonable grounds to believe that coverage may not be a security during the exclusion, and Flexi-Van failed to provide additional evidence that Travelers' booking of rights was unreasonable. The verdict was confirmed.

Flexi-Van was hoisted on its own petard by firing a competent defender appointed by its insurer for a non-existent conflict of interest, by asking an insurer to have its appointed attorney work because it had not promised to provide through their policies and by seeking defenders to work for free. Firing defender when he refused to work without pay and without a real conflict Flexi-Van gave Travelers a gift it did not seek.


© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to working as an insurance consultant specializing in insurance coverage, insurance claims handling, cheating and insurance fraud almost equal to insurance policyholders . He also acts as an arbitrator or mediator for insurance-related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine / ACE Legend Award.

For the past 52 years, Barry Zalma has devoted his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to enable insurers and their claims staff to become professional in insurance claims.

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